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Wall Street’s new housing frontier: Single-family rental homes

Why single-family rental homes became a magnet for corporate landlords

Jennifer Paul St. Denis thought she had found the perfect landlord. A mother of two from Marietta, Georgia, St. Denis had been looking for a new home last summer after separating from her husband.

Her search didn’t take her far. After spotting an ad from a company called Waypoint, she discovered they had a “super-cute” two-story home with a yard and back porch a few blocks away. At $1,449 a month, it was even within her budget.

St. Denis loved staying in the same neighborhood, but, just as importantly, she appreciated the security that came with her new landlord. Waypoint is one of a new breed of large-scale corporate landlords heavily invested in the single-family rental market. (Waypoint has since merged with Invitation Homes. At the time St. Denis moved in, the company had a multi-state portfolio of more than 30,000 homes.)

“Being a [newly] single mom trying to find a good place for my kids, it was appealing to have a company with the staff and resources to solve problems I didn’t have time to address,” she says.

That impression quickly changed after a storm hit this spring.

Just after midnight on Friday, March 23, a severe storm uprooted a tree that crushed St. Denis’s back porch and sent a branch through the roof above her 10-year-old daughter’s room. St. Denis’s 6-year-old son, awakened by the storm, started screaming, “Mommy, our house is falling down!”

Later that morning, St. Denis called Waypoint’s national emergency line. After St. Denis explained that her porch was gone and rain was coming into her house, a company representative sent a roofer that evening to put a tarp over the gash in her home. She says that was the last significant repair completed for nearly three weeks.

Despite repeated calls (nine in total) to Waypoint asking for help, St. Denis says it took a week to get the tree removed, but there were no additional repairs.

Fed up, St. Denis called a local television station. A few days later, on April 12, a reporter filmed a segment on her story, showing a significantly damaged home. The broadcast got Waypoint’s attention, and the company quickly sent contractors to fix St. Denis’s roof and offered one month of free rent.

“We regret we didn’t fully address all the issues more quickly,” a representative for the company told Curbed. “In every instance, Invitation Homes is committed to providing residents with great service.”

How the foreclosure crisis created the single-family rental industry

The industry is composed of a small number of key players. Invitation Homes and American Homes 4 Rent, the second-biggest single-family rental company, got their start in the early 2010s by taking advantage of bargain prices on foreclosed homes by buying huge numbers of properties in bulk. Since then, other companies, like Progress Residential, Main Street Renewal, and Tricon American Homes, have formed, and the industry as a whole has amassed a cache of about 200,000 single-family homes and turned them into rental properties.

Granted, 200,000 represents a rather small slice of the 14 million units that make up the single-family rentals market in the U.S. And the bulk of landlords for these single-family homes are still small “mom-and-pop” operations, each of which owns only a few properties.

Largest single-family rental companies

Company Total Homes Securitizes homes Publicly traded
Company Total Homes Securitizes homes Publicly traded
Invitation Homes 82,570 Yes Yes
American Homes 4 Rent 51,840 Yes Yes
Progress Residential 20,000 Yes No
Main Street Renewal 17,000 Yes No
Tricon American Homes 16,800 Yes No
Front Yard Residential 12,416 Yes Yes
Source: Financial filings, news reports, Maya Abood

Because single-family rental companies own such a small portion of the single-family rental market, it’s unlikely anything they do could have a significant effect on the housing market as a whole. But because the homes they bought are highly concentrated in areas affected by the foreclosure crisis, these companies could have an outsize impact on individual cities and specific neighborhoods.

Rep. Mark Takano (D-CA) expressed concerns in 2014 that should one of the companies decide to pull out of a market or neighborhood by selling its homes there, it could lead to a destabilization of the housing market. As market conditions have shifted, the companies have made adjustments to their portfolios by buying and selling different properties, but they remain highly concentrated in particular local markets.

Single-family rental industry participants often tell investors that they are catering to millennials, who, they argue, prefer to rent because of a lifestyle that stresses experiences over “assets.” The implication is that the companies aren’t impeding homeownership for people whose homes were foreclosed on during the financial collapse, but are merely offering a service on the basis of evolving consumer preferences.

But that assessment of their tenants may be wrong. Maya Abood wrote her master’s thesis in urban studies at MIT on single-family rental companies and conducted a survey of 100 tenants in Los Angeles County. Rather than experience-obsessed millennials, Abood found low- and moderate-income families with children in multigenerational or nontraditional family structures. Many were people of color.

According to a recent study by the Alliance for Californians for Community Empowerment Action (ACCE), which spoke to more than 100 residents of single-family rental homes, tenants of these companies “are negatively impacted, with large annual rent increases, fee gouging, a high rate of evictions, and rampant habitability issues.”

A 2016 study by the Federal Reserve Bank of Atlanta found that large corporate owners of single-family rentals in Fulton County, Georgia, were 8 percent more likely than small landlords to file eviction notices.

The companies focus on markets where unemployment is low, higher-paying jobs are plentiful, and quality single-family homes are the primary form of housing — places like Los Angeles, Dallas, Atlanta, Florida, and Phoenix. These markets allow the companies to charge annual rent increases with the expectation that tenants can sustain them.

In aggregate, single-family rental companies charge rents comparable to market rates for any given city. In most markets, single-family rental companies charge a slightly higher average rent than estimates provided by RentRange, a third-party data-collection company that provides rental intelligence for real estate investors and landlords.

According to a monthly Morningstar report on the single-family rental securities market, companies across the industry have consistently raised the rent on tenants who renew their leases by 4 percent every year. For new tenants who are signing their first lease on a home, the rent increase compared to what the previous tenant paid varies seasonally: Rent increases are lower in the winter and higher in the spring and summer.

Ultimately there is a rent price at which prospective tenants balk and move on to another house, leading to a vacancy for the single-family rental company. The companies try to keep vacancies as low as possible because they can be more costly than losing $50 or $100 in monthly rent. Vacancy rates can run anywhere from 2 percent to 8 percent, depending on the company and the season.

“They’re running it like a business, and when you’re running it like a business, you don’t get the rent break because you invited the guy over for dinner like if your next-door neighbor owned your house,” said Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center. “But it’s run like a business and it doesn’t do the business well to give people large rent increases and have them move out, because then you’ve got a vacancy on your hand.”

The desire to keep vacancies low can potentially put a ceiling on what landlords will charge in rent, but that cap can also lead to other cost-cutting maneuvers that negatively impact tenants. St. Denis and other former residents interviewed for this article claim that these corporate landlords are slow to respond due to a lack of local staff on the ground and a reliance on contractors, and that the companies skimp on repair and maintenance.

Recent moves to standardize leases and increase maintenance costs have proven profitable. Waypoint’s 2016 annual report cites a 51 percent increase, from $17 million to almost $26 million, in “other property income” like service charges, tenant chargebacks, late charges and early-termination charges. A former Waypoint CEO said failure to harvest the “low-hanging fruit” of ancillary revenues, such as fees, is “revenue leakage.”

Many of these incidents can cause serious short- and long-term financial issues for both current and former renters.

Dana Chisholm, a former Waypoint renter in La Mirada, California, says the company never fixed her pool after months of leakage, and that she was served eviction notices after the company never cashed her rent checks. Due to Chisholm’s threats of litigation, Waypoint declined to comment on the case.

Kirk Anderson, of Orlando, Florida, says that a severe rodent problem in the Waypoint rental home he shared with two roommates required them to hire their own exterminator, after the company’s contractor did a subpar job. (Waypoint says it sent a professional service out that returned four times to take care of the problem, and it considers the matter taken care of.) He ended up being charged hundreds of dollars in fines when he moved out, including $700 for carpet cleaning, after he had already paid for a separate cleaning service. A Waypoint rep noted that the company never received a copy of his cleaning receipt.

Lisa Ginter and her family lived in an Invitation home in St. Augustine, Florida, for six months that she alleges in a pending lawsuit was so mold-infested that she and her family spent tens of thousands of dollars on medical care. According to court filings, after her family left the home in December due to the environmental risk, Invitation obtained a court notice that they had abandoned the house.

Ginter, who says her family felt that a company with “deep pockets” should have the manpower and resources to take care of their homes, says it felt like it took “an act of God” to get Invitation to respond to repeated calls and requests for repairs or assistance. Invitation representatives declined to comment on the case, citing pending litigation.

“It’s so stressful, you can’t imagine,” Ginter says. “You’re on the phone repeatedly. It’s a joke. And they do have the money, if they chose to spend it. They’re more concerned about stockholders. They’re several arm’s lengths away, outsourcing their help.”

When asked to respond, an Invitation spokesperson said: “​Invitation Homes only succeeds as a business if we deliver value for our residents with high-quality houses and great service. We have over 95 percent occupancy, approximately 70 percent renewal rates and outstanding satisfaction scores that demonstrate we do just that.”

Wall Street’s new product: single-family rental securities

When the American housing market crash brought the world economy to its knees in 2008, much of the blame fell on Wall Street and the esoteric financial instruments banks used to bring loose credit to the housing market: mortgage-backed securities (MBSs).

So, naturally, when news emerges that Wall Street firms have cooked up new financial products related to housing, alarm bells go off in the news media—and the public. And so it was in 2013 when Invitation Homes bundled thousands of single-family rental units into a new type of asset-backed security, in a deal that raised just shy of $500 million for the company.

But what level of alarm does the securitization of single-family rentals really warrant? In short, not much: These securities are more like business loans in the form of bonds than the pre-crisis mortgage-backed securities that led to the 2008 financial crisis.

While the securitization chain with pre-crash mortgage-backed securities was long, the borrowers at the bottom of the chain were ultimately homebuyers. In most instances, a mortgage lender would lend a homebuyer money for their purchase and then sell that loan to Fannie Mae, Freddie Mac, or another bank. Those institutions would then bundle the mortgages into a security and sell them to investors. The proceeds from the security would be used to buy more mortgages to bundle into other securities. This chain brought global investor cash into the American housing market—and still does.

In the case of single-family rental securities, however, the borrower is a corporation. These companies bundle the rental income from the properties they own into securities to issue a bond. The companies sell the securities to investors to raise money now like a loan, and they pay the loan back over time using rent checks from their properties.

So are these new securities destined to infect the global financial system and bring it crashing down the way mortgage-backed securities did in 2008? Probably not: There are key differences. The first is that the volume of residential MBSs in 2008 (around $7 trillion) was dramatically higher than the volume of single-family rent securities today ($17.4 billion), according to the Securities Industry and Financial Markets Association.

The second is that there is a lower likelihood of these securities defaulting because, for better or worse, the single-family rental companies have the power to quickly evict tenants who can’t pay their rent, thus keeping rental payments flowing into the securities. The single-family rental securities are more akin to commercial mortgage-backed securities, in which rent from office tenants is bundled into a security.

Because each home can’t be in more than one security at a time, that limits the number of securities companies can issue on their rental properties. And a good deal of those homes are already committed to existing securities, most of which have a maximum duration of five years.

As a result, single-family rental security issuance has slowed down. According to the Securities Industry and Financial Markets Association, single-family rental security issuance peaked in 2015 at $6.9 billion and fell to $5.1 billion in 2017. For comparison, private institutions—meaning not counting Fannie Mae or Freddie Mac—issued $933.6 billion in subprime and alt-a residential MBSs in 2006.

As home prices in most markets have returned to their pre-crisis peaks, it’s harder for a company to get the same return on its investment as it did when it bought homes out of foreclosure after the collapse. According to Moody’s, single-family rental companies spent between between $20 million and $30 million on home purchases per month in 2016. In 2013, it was around $100 million per month.

But the companies have still found a way to amass more homes: mergers. In 2015, Colony American Homes merged with Starwood Waypoint Residential Trust to form Starwood Waypoint Homes. In 2017, Starwood Waypoint merged with Invitation Homes to form the largest single-family rental company by about 30,000 homes.

With home prices back to their pre-crisis peaks, the focus of many single-family rental companies has shifted from property acquisition to property management. They now work to find operational efficiencies to get the most out of the homes they already own.

Given that single-family rental securities are such a small—and, for now, shrinking—part of the overall MBS market, even widespread default would be only a minor event in financial markets. That doesn’t mean Wall Street’s involvement in rental housing doesn’t have potential consequences. The broader implications of turning people’s homes into a tradeable asset for Wall Street bankers were on full display during the housing collapse in 2008.

One of the remarkable things about that event was how quickly the bubble inflated and subsequently burst. Bad lending practices started seeping into the market in 2003, and five years later the global economy was in free-fall.

So while the financial machinery around single-family rentals looks benign now, it can change in a hurry. Unlike in 2008, though, the risk falls on tenants, not the financial markets.

Tenants are subject to the financial demands of the companies that own their homes, who in turn are subject to the owners of the single-family rental securities they’ve sold and, in some cases, their shareholders (for those companies that have gone public).

If opportunities for company growth slow down as home prices rise, the pressure will be on to get more out of each house, which could mean higher rents, more fees, itchy eviction fingers, or cut corners on issues like maintenance.

Single-family rental companies and the landlord–tenant relationship

These new single-family rental companies, and the industry as a whole, raise questions about the relationship between landlord and tenant. The question seems to be one of scale, one that these large companies are still trying to figure out, with the help of sophisticated analyses and centralized operations.

At a time when so many relationships are rendered obsolete by technology, tenants may not miss having a landlord come around for rent on the first of the month.

But that interaction with a local landlord, invested in his or her neighborhood and tenants, can sometimes be worth holding onto. Ask Jennifer St. Denis.

Despite the trouble she had getting her home fixed after the recent spring storm, she decided to stay at her corporation-managed rental, and re-upped for another year. She doesn’t want to uproot her kids again, and believes she’ll be treated better after her media exposure.

But her faith in the company has been shaken, and she feels bad that she had it much better than many of the other tenants of Waypoint, Invitation Homes, and similar companies.

“I shouldn’t have had to call every day and re-explain what was happening every time I called, and tell them why a tarp won’t hold up in severe storms,” St. Denis told Curbed. “I felt very alone.”

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